Despite the challenges of the pandemic and fluctuating markets, practice valuations have reached an all-time high. Since January 1, 2020, we have completed over 400 practice valuations. Compared to previous years, valuations are significantly higher, averaging at $2 million and selling for multiples of 2 to 3 times revenue.
Many factors are impacting this historic high in practice values. Over the years, advisors have shifted away from transactional revenue as their primary source of income to more recurring revenue. This creates more reliable income streams. Advisors are also improving across the board in terms of operational efficiency, which is making practices more profitable. An unusually strong seller’s market coupled with low interest rates and increased access to capital is also helping to drive practice values up. Partial client group sales are doing particularly well in this market, allowing advisors to take back time while monetizing partial equity and taking risk off the table.
Client age and segmentation are two factors that often drive practice value down. However, many advisors have learned to better target high value clients while employing generational planning to preserve client assets. Internal successions also help to improve continuity of assets and ensure long-term growth, helping advisors avoid a decline in value that happens once a practice stops marketing and existing clients reach retirement and start drawing down assets.
Advisors who have not implemented continuity planning or employing generational planning will likely start to see a decline in value soon. As the looming “age wave” begins and many senior advisors start to retire, we may also see a shift from a seller’s market to a buyer’s market, which may also impact practice values and equity events for retiring advisors. Advisors can maintain practice value by learning about the drivers of practice value and regularly comparing their firm to industry benchmarks by seeking an annual valuation and consultation.
